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Arjun Golani

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Arjun Golani (arjun)

  • Email: arjun@collegepond.com
  • Nice Name: arjun
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  • Registered On :2019-01-17 11:34:51
  • Logged in at: arjun
  • Author ID: 1007126

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As the year 2018 draws to a close, the value of the Indian Rupee continues to plummet. Losing more than 60% of its value since 2010, it has been continuously depreciating against the US dollar for nine consecutive years. This persistent trend makes the practice of pre-booking dollars in advance at fixed prices a handy tool to save money on foreign currency spending. In this regard, options and forwards are two financial contracts that enable individuals to reserve foreign currency. To gain a clear understanding of the specifics of these contracts, let’s consider a small example:

Mr. A has to spend $10,000 to pay for his child’s education after six months in July. Currently, in the month of February, the dollar is trading at INR70. Following the current trend, Mr. A expects it to reach to INR 75 by July. According to Mr. A, his child’s education, which currently (in February) costs INR 700,000, will cost INR 750,000 (in July) when his son actually starts his studies abroad and requires the money.

In a bid to make a diligent financial decision, Mr. A wants to buy $10,000 at the current price of INR70 (in February) but wishes to receive and use it after six months (in July). Talking to his bank representative, he learns about forwards and options contract and now compares the two to see how they may benefit him.

Forward

In February: Mr. A makes an agreement with Bank B in February to purchase $10,000 dollars at a price of INR 71 in July. Although the current price is INR 70, Mr. A would still profit at buying them at INR 71 as he expects the price to jump to INR 75.

The Bank asks Mr. A to pay an initial margin of INR 50,000 to finalize the contract and ensure that Mr. A does not backtrack from it later.

Between February to July: If the price of the dollar remains at 70, or increases to 75, things will be smooth. However, if it uncharacteristically drops to 65, and the contract goes against Mr. A, he will be required to pay a margin i.e. the money to ensure that he would not back down from the contract. This margin would be deducted from INR 710,000 that he will pay in July.

In July: Mr. A has to honor his agreement and purchase $10,000 at INR 71 from Bank B. The margin paid by him would be deducted from INR 710,000 that he is liable to pay. It does not matter whether the price of the dollar has increased or decreased.

A forward will obligate a buyer to buy the currency at a preset price at a predefined date. The buyer of an option will have to purchase the currency, irrespective of its price in that period. The buyer of a forward needs to post a small initial margin and, if the contract moves against the buyer, he may have to post extra margin as well.

Option

In February: Mr. A buys a ‘Call’ option (right to buy at maturity) worth $10,000 at a price of INR 71, which matures in July. To secure this option, the issuing Bank B asks the buyer to pay a premium of INR 15,000. The paid premium will not be deducted from the final payment if Mr. A choses to use his contract.

Between February to July: No activity expected from the buyer.

In July: The buyer can now choose to purchase the dollars depending on whether it is profitable for him or not. Considering the two scenarios that Mr. A may face the below-mentioned scenarios:

If the price of a dollar goes below INR 71: Although Mr. A expected the rupee to devalue, it didn’t. It is therefore not profitable for Mr. A to buy $10,000 dollars at a price of $71 from the option as he can buy it at a cheaper rate in the market. Therefore, the buyer can choose to not exercise the option. In this case, he loses his premium but protects himself from a possibly larger loss.

If the price of a dollar goes above INR 71: Mr. A would want to exercise the contract and, therefore, buys $10,000 at 710,000. The INR 15,000 is not deducted from the total price.

An option contract would give a buyer a choice of buying the currency at a preset price on a predefined date for a small premium price. An option contract becomes profitable only when the fluctuation in the currency is high enough to offset the premium.

Forward v/s Option v/s No Contract

Consider the three scenarios where the future price may alter, understanding the utility of engaging in these contracts for Mr. A. assuming that Mr. A wants to buys $10,000 at a future price of INR 71.

If the price of a dollar becomes 65 at maturity:

Forward: Mr. A has to purchase $10,000 at INR 710,000, thus sustaining a loss of INR 60,000.

Option: Mr. A can choose to not exercise the option and purchase $10,000 at a market price of 65 at INR 650,000; and incurs a loss of only INR 15,000 premium.

No Contract: Mr. A can purchase $10,000 at INR 650,000 i.e. the market price.

If the price of a dollar becomes 75 at maturity:

Forward: Mr. A purchases $10,000 at INR 710,000; thus, saving INR 40,000.

Option: Mr. A can choose to exercise the option and purchase $10,000 at the decided price of INR 71 at INR 710,000. As Mr. A has paid a premium of INR 15,000 initially (to secure the contract), he saves INR 25,000.

No Contract: Mr. A can purchase $10,000 at 750,000 i.e. the market price.

Conclusion

Using an options, forward or no contract would depend on one’s assessment related to currency forecast. For buyers who want to hedge against the risk of the appreciating currency, options may be a costlier but better alternative. On the other hand, buyers who are confident that the currency will devalue can opt for forward as it may save them the cost of paying the premium. If one feels that there may be only small devaluations in the rupee, a forward may be a better choice as one is not required to pay a premium or an extra charge on the contract. To conclude, both option and forward contracts have their own benefits and can be used as powerful tools to hedge against uncertain fluctuations in currency.

Are you looking to enhance your career prospects? Well then, the simplest and the most effective solution is to pursue higher education in a foreign country and subsequently, secure a job in that country. Whether it is the US, Canada, Australia or Germany, all these countries provide a facility to secure a work visa upon graduation as long as you get a job, which is not a very difficult proposition provided you network and identify the right school to pursue your higher education at.

The prospect of studying abroad is expensive, costing anywhere between 20-25 lakhs per year, on an average, and also depends on the chosen destination, program and University. Therefore, it is important for students and the families concerned to explore funding opportunities like loans and scholarships, well in advance.

Fortunately, the market for study loans has expanded considerably over the years with quite a few players entering the fray. There are two types of loans, namely secured and unsecured loans. As secured loans require collateral in the form of real property or other assets, many students prefer unsecured loans. Though the rates vary by as much as 1.5 – 2% between the two loans, the process is virtually the same namely,in-principle sanction, sanction, and disbursement.

  • In-Principle Sanction: A few banks, especially public sector banks, are reluctant on confirming loan grants until one receives the I-20 from the USA University. While you need to show your financial competence to the University to get the I-20, the Bank requires you to show the university I-20 to confirm the loan offer. In case you wish to avail of loan from such banks, you can be in a bit of catch-22 situation.

At times, the bank offers you what is called an ‘In-Principle Loan Sanction Letter’ wherein the bank states that a particular amount of loan shall be sanctioned to the student in case his admission to a particular University is confirmed. However, one must remember that such an ‘In-Principle Loan Sanction Letter’ is not accepted by majority of the Universities, and therefore, if you plan to show loan as proof of financial capability to the University, you need to necessarily obtain the loan from a provider who is willing to sanction the loan without the i-20.

  • Sanctioned Loan : If you choose to avail of education loans from dedicated education loan providers, most of which fall in the non-banking financial corporation (NBFC) category, such as HDFC Credila or Auxilo Finserve, you will be able to obtain a ‘Loan Sanction Letter’ even before the confirmation of admission. Even banks for that matter, upon confirming your loan after you provide a proof of admission, readily offer you the Loan Sanction Letter. By sanctioning the loan, the bank confirms that the loan of specified amount has been granted to the student. The Loan Sanction Letter also specifies the terms and conditions of the loan, such as the repayment period, rate of interest, moratorium period if any, any loan pre-payment clauses, etc. For getting the loan sanctioned, students are typically required to pay a processing fee of as a percentage of the sanctioned loan amount, along with cooperating with the bank for the KYC process involving offering information such as their residential address, employment place, employer credentials, telephone numbers, family income details, past credit history, etc. to the bank officials. The process is subject to scrutiny in case the paperwork does not conform to the requirement. In case of any discrepancy, the loan can be rejected by the bank. Hence applying for CIBIL ratings to assess one’s creditworthiness becomes very important.

The sanctioned amount is sufficient proof for the student to show to the universities and get their I-20. Over 98% of the U.S. universities accept this sanctioned amount.

  • Disbursement: Once a loan is sanctioned, depending on your requirement, you are offered the flexibility of utilizing a part of the sanctioned amount or the entire sanctioned amount. You cannot avail of loan beyond the sanctioned amount. Loan disbursement is a process where you ask the bank to transfer the requested amount into your account or make a payment to the University directly. A student can choose to get the loan disbursed in parts at different points of time during his education tenure, or in full at once. The interest component and the repayment of loan (EMI/ partial EMI/etc) only begins after the disbursement of the specified amount. If the student decides not to avail of any disbursement, all he would end up paying is the initial processing fees.

Collegepond offers loan assistance and guidance to various students through their associations with various banks and NBFCs. To avail of these services feel free to email services@collegepond.com

Are you an overseas-bound student applying for admission to foreign universities? Whatever maybe be the level and stream of the program you are applying for, studying abroad can be an expensive proposition. Therefore, it is important to ensure that you have the financial wherewithal to support and see you through your study abroad endeavor, as the cost of the program requires budgeting beyond tuition fees to include your lodging, travel and day-to-day living expenses. This is where grants and scholarships can help you secure your study abroad funding process.

Before you can avail of the financial aid, it is important to understand the process of scholarships and grants and evaluate them to determine your suitability for the same.

Here is a look at the various types of financial aids that you can benefit from to enliven your study abroad dream.
Scholarships – Most of the scholarships are merit-based financial aid given to students with proven academic credentials, notable extracurricular or sporting achievements, community achievements, leadership qualities, character, etc.
Grants – These are need-based financial aids given on the basis of your family background, financial status, etc.

So what’s the difference here?

Need-based scholarships are usually provided to local students, for example, universities in the US prefer to grant scholarships to American nationals on a priority basis. This is the case with most countries, with each country giving preference to its own student community.

Merit-based scholarships, on the other hand, adopt the following approach:

The judges of the universities you are applying for will evaluate your entire profile which includes your overall academic grades and test scores like GRE and IELTS/TOEFL, your internships and jobs, personal accomplishments, community service, etc. So, it is important to make a list of all your achievements – both academic and extra-curricular. Mention if you have received any scholarships during your college or any awards during your professional work or internship.
Point out the leadership experiences and involvements in social and cultural activities that can distinguish you from the thousands of equally merited applicants.

Further, the university may offer scholarships along the following lines :

1. First-In-First-Out: This process follows the ascending order of application and the profile suitability of students. For example, NY Tandon and RIT in USA
2. While applying: Some universities provide you with the option of applying for scholarships online, during the course of your admission process. For example, TU Delft in Netherlands
3. Along with Admit: Some universities grant scholarships at the time of admission. For example, UIC, CMU, Ny Tandon, etc in USA
4. Apply at Admit: Some universities offer you the option to apply for a scholarship after you are admitted. For example, UT Dallas (USA)
5. Upon Checking-In: You can also apply for a scholarship once you are at the university and have cleared the personal interview rounds. This applies to majority of the universities ranging from GaTech to ETH to Stonybrook to University of Melbourne, etc

Most of the universities offer scholarships after you have cleared interviews with the admission panel and professors. You have to prove your worth at a holistic level, your skills and abilities to keep up with the coursework at the University will be duly tested. Most importantly, you have to convince your suitability for the grant by convincing the panel of contributing to the applying university and the host country as an international ambassador.

Sometimes, during the first semester, the professors may ask you to work on a minor project relevant to the course you are applying for on the basis of which he/she would consider you for a scholarship in the form of RA / TA which would commence from your second semester onwards. This gives you ample time to converse with the professors, discuss your interest in the course, work on your project and prove that you are worthy of the intended Assistantship and convey your serious intent to contribute to the ongoing research.

Furthermore, if you are looking for financial help through private funding, associations in India provide loans and scholarships.

You can apply for an interest-free loan ranging from INR 20,000 to 20,00,000, which you will have to repay as soon as you start earning. You can also apply for a scholarship ranging from INR 20,000 to 10,00,000.

If you are looking for interest-free loans and scholarships in India, you will have to do the following:

Essay & Letter of Recommendation :

You will be required to write an essay stating your goals and talk about how you intend to acquire knowledge and obtain a degree from a foreign university, come back to India and make a difference to the society by putting your learning and knowledge to best use. Ensure that your career goals India-centric. Also, make sure to talk about the social benefits that would accrue out of your professional work. How you intend to contribute to the economic development of India through your work?

You can also stress on how obtaining the scholarship would ease the financial constraints your family is likely to be subjected to in the event of self-funding. You also need to convince the donor about how being self-sufficient would enable you to pursue the program with poise, security, and confidence and motivate you to excel academically.

Your letters of recommendation should highlight your zealousness to acquire quality education from a foreign country and demonstrate your capability to contribute to the progress of India. It is a good idea to include how your learning at the university can help you in contributing to the benefit of the Indian society at large.

Interviews:

Here, you will have to interact face-to-face interaction with the panel responsible for granting you the loan or scholarship, and explain your position of wanting to be self-sufficient. Most importantly, you have to convince the panel of your overall worthiness to avail of the financial aid, and your desire to make a difference to your country and society upon completing your education.

Here is the list of scholarships we have collated. We will keep on updating this excel sheet.

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